Taxation for China Representative Offices
China Representative Office Taxation Service
Hotline: 86-755-82143348, Email:email@example.com
Taxation for China Representative Offices means that once the once the Representative Office is officially registered, it's required to maintain properly accounting records in accordance with accounting standards in China and report taxes in both monthly (for business tax) and quarterly (income tax) basis. The late submissions will face penalty and surcharges.
Taxation for China Representative Offices – The Issues
The application by a foreign company to set up a representative office in China is a bureaucratic process. After obtaining their business licenses, representative offices must go through registration formalities with the local bureau of quality and technical supervision, local tax bureau, local statistics bureau, etc. At that time, the tax reporting method (e.g. the cost-plus method) should be negotiated.
PRC tax returns and payments are required quarterly (for income tax) and monthly or quarterly (for business tax). Late filings are subject to penalties and surcharges. Inconsistency between the operating expenses reported and the representative office's permitted scope of activities or its individual income tax reporting can lead to penalties and surcharges on a tax audit.
A representative office must fulfill three types of taxes: Business tax, Income tax and Additional tax.
Taxation for China Representative Offices – The Business Tax (BT)
In principle, the business tax is based on the turnover, but this does not affect the representation office because the latter does not realize sales on its behalf. So the expenses are taken into account in calculating the amount of the tax. It is recognized by convention that the turnover is equal to spending totals/85%, multiplied by the 5% corporate tax rate that is applied in China. Note that the calculation mode of the Business Tax can vary depending on the field.
Taxation for China Representative Offices –Tax on Income
Income tax is calculated on gross profit, but for the same reasons that the business tax, it is recognized by convention that the result is equal to total expenditure * 10%, which is applied the conventional rate of 25% in China of the income tax (tax on profits). Note that in the calculation of the income tax, the foreign company does not receive tax relief as opposed to the foreign employee.
Taxation for China Representative Offices – Additional Tax
The additional tax is calculated on the basis of the business tax. It actually includes two taxes. On the one hand, the tax on the construction and maintenance of cities is ranging from 1% to 7% depending on the location of the company (7% in cities, 5% in suburban districts and 1% elsewhere). On the other side, a tax on education is with a fixed rate of 3%.
In the end, the tax rate is approximately 10.94% (according to the new regulations of 2010) and thus a representative office can be quite expensive, knowing that it is not allowed to trade.
The tax reporting is done on a monthly basis for trade tax (business tax). The income tax is, however, determined on an annual basis but payments are payable every 3 months.
The State Administration of Taxation (SAT) lists the following types of taxable activities that a representative office may perform: -
Acting as a merchandise trade agent;
Consulting services relating to business, legal, tax and accounting;
Services performed for a resident fellow subsidiaries of the same non-resident holding company;
Acting as advertising agents;
Providing services relating to visa handling, fee collecting, ticketing, tour operator, and hotel accommodation for non-resident tourist companies;
Consulting services given on behalf of non-resident financial institutions;
Providing services within the business scope of a transport company;
Other taxable activities the RO performs for the clients.
The following activities are not subject to income tax and business tax:-
Resident representative offices performing services of market research, providing business information, liaison, consulting for the non-resident head offices on a free of charge basis;
Resident representative offices taking instructions from resident companies to act for them as agent, and the agency activities are mainly performed outside the PRC.
And there is another issue to clarify, so let’s look at the table:
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